The ZBB seemed to fall out of favor when the economy recovered. High rates of inflation in the 1970s, followed by a significant recession in the early 1980s, rattled most public spending. The idea spread to other levels of government as well. When Carter became president in 1977, he brought the ZBB process to the federal budget. Companies can use those savings to drive growth, reduce debt, acquire assets, or pay more substantial dividends.Īfter the Harvard Business Review published Pyhrr’s influential article about his ZBB method, Jimmy Carter, then governor of Georgia, reached out to him about applying the method to his state budgeting process. ![]() However, ZBB is now more about building a cost-conscious culture than it is about literally starting from zero.Īccording to McKinsey, a ZBB strategy can lead to a 10-to-25 percent cost reduction in sales, general, and administrative costs. Some businesses still use the ZBB approach, or some version of it, today. Zero-based budgeting (ZBB) originated with a guy named Pete Pyhrr, who successfully used the approach as a manager at Texas Instruments, a semiconductor manufacturer, in the 1960s. ![]() From a traditional budgeting approach, you must ask yourself, “Can I live without cable?” But from a ZBB approach, you start with the assumption that you don’t have cable and ask, “Given my current financial situation, can I afford to add it?” Nothing slips through the cracks unchallenged.Ĭonsider the need to reduce your budget by $50 a month. ZBB reevaluates expenses, given the current financial situation. In many cases, the spending is never questioned again. Under traditional budgeting, once something becomes part of the base budget, it’s difficult to remove. Rather than seeing it as a potential loss of something you already have, ZBB makes you view each item as a new expense you might not be able to afford. The different framing changes the way you perceive a budget item. Rather than assuming that previous spending levels should stay the same, it assumes that every dollar should be justified. ![]() Zero-based budgeting (ZBB) starts from a different premise. Or if a city wants to expand the number of police officers, it might request an addition to its base budget. They then consider changes to that base.įor example, if the marketing department wants to launch an advertising campaign, it might ask for an increase of $1M to its base budget. Those overseeing the budget start by assuming that a given business unit, agency, or spending category needs the same amount of money as before. In a traditional budgeting process, spending from the previous period serves as a base for the next one.
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